Question

Derive the two alternative conditions of expressing National Income Equilibrium. Show these equilibrium conditions on a single diagram.

Answer 1

AD = AS is at E where AD curve intersect 45^o line at E

S = I is at E', when Saving Curve intersects Investment Curve at equilibrium National Income is OM.

Detailed answer:

The two Alternative Approaches of National Income determination are:

(i) AD = AS which is on E in the upper part of the diagram when AD curve intersects the 45^o line with equilibrium income OM.

(ii) S = I which is at E' in the lower part of the diagram, when saving curve intersects the investment curve at E with OM, as the equilibrium income level.